2008 may become known as the year of the mortgage meltdown. Particularly notorious in this incipient plague is the bacterium called the "sub-prime mortgage." This financing device can be (or was) as diverse as Amazonian flora and fauna. But, in essence, sub-prime mortgages are loans that for various reasons are too risky for Fannie Mae and Freddy Mac to guarantee them. Serious macroeconomic trouble arose when sub-prime borrowers began to default on their loans. This in turn meant that those who sold securities that comprised pools of sub-prime loans began to lose money and often came under intense pressure. Indeed, when the bubble popped, with the shocking and swift decline in the worth of the often esoteric financial products that were at issue, it wobbled the world economy. In response, many bankers behaved heroically and acted quickly—and still are—to shore up the financial system. Yet, perhaps more than a few did not acquit themselves as well either during the mortgage boom or during its bust.

Thus, the Eastern District's U.S. Attorney, Benton J. Campbell, created a task force from federal, state and local agencies to examine the "sub-prime" mortgage crisis in focused detail. The Brooklyn-based team—led by Assistant U.S. Attorney Jonathan Green and comprising approximately 15 law enforcement agents and investigators—will determine the role that criminal behavior may have played in inflating the mortgage bubble. AUSA Green's task force will seek to explain if this was simply bad business, or if actors from mortgage brokers to investment bankers may have broken the law.

In particular, the EDNY squad is focusing on the mortgage companies who loaned money to home buyers, on the Wall Street firms who packaged and sold those loans as securities to investors, and on the rating agencies who assessed the securities' value.

What are the potential criminal issues concerning the sub-prime problem?

Mortgage companies face possible criminal exposure in several areas. First, the task force will examine if mortgage brokers steered borrowers into expensive sub-prime loans even though the borrowers might have qualified for other, more conventional loans. If so, the brokers may be guilty of traditional fraud. Conversely, brokers may have aided poorer borrowers to buy houses that they simply could not afford.

Second, investigators will also try to determine if officials from these companies made material misrepresentations in securities filings about a company's financial position and the quality of its mortgage loans. Here, AUSA Green's team will want to know if mortgage companies properly disclosed the rising number of loan defaults, or if they broke accounting rules by trying to hide these losses. They will also question to see if mortgage companies may have broken securities laws by manipulating information about the borrowers whose underlying loans composed the mortgage-backed securities the companies sold to banks, Wall Street firms, and other investors. These sellers may also have neglected to give the securities' buyers complete disclosure about the loans themselves. For example, mortgage companies may have failed to reveal that they sold directly to investors, such as Fannie Mae and Freddie Mac, loans that they had originated using money borrowed from their Wall Street lenders.

And as the June arrest of two Bear Stearns bankers shows, Wall Street firms themselves may not escape the task force's scrutiny. In effect, the government's case against two former Bear hedge fund managers Ralph Cioffi, 52, and Matthew Tannin, 46, hinges on a single theory: Cioffi and Tannin attempted to keep investors from pulling out of several of Bear's funds by failing to disclose the growing mayhem in the mortgages that formed the funds' underlying securities. This means that U.S. Attorney Campbell's team will probably try to show there were, in effect, two sides to Cioffi and Tannin: In private they manifested their fears about sub-prime debt, while they told the public that Bear's funds were strong and secure.

In other potential investigations, prosecutors will examine whether, and if so, the extent to which, Wall Street brokers misstated the quality of the underlying loans in their structured-debt obligations. That is, bankers may have said that their offerings comprised only highly-rated corporate debt, when in reality they were diluted with sub-prime mortgages instead or in addition to the higher-rated debt.

The task force is not the first time that the Eastern District has investigated the sub-prime mortgage crisis. For example, Brooklyn-based prosecutors have already examined whether investment bank UBS AG properly valued its mortgage-backed securities holdings. U.S. Attorney Campbell's lawyers have also investigated alleged accounting improprieties and false statements by current and former executives of American Home Mortgage Investment Corp., a Long Island, N.Y., mortgage lender that collapsed last year.

Of course, the EDNY team is not the lone actor in this continually-unfolding drama. For example, New York's attorney general, Andrew M. Cuomo, has been running a year-long investigation into how Wall Street banks bundled billions of dollars of dubious loans and other sub-prime debt into complex mortgage-backed securities investments. Connecticut's attorney general, Richard Blumenthal, is also reviewing the practice.

Yet, the fact that the Eastern District has created a dedicated task force demonstrates that companies in this region face a potentially long, and high-stakes, period of heightened scrutiny. And as a result, it could be a tough second half to an already-rough year.